Last week the BEA published it preliminary take on the international investment position (IIP) of the country. As Citi's FX team note, the IIP measures foreign investment assets minus native assets owned by foreigners. In the US, the IIP has been negative (meaning the US is a debtor nation) since 1985. The US’s IIP deficit reached USD 4.03trn in 2012, up sharply from 2.47trn in 2011. As a share of nominal GDP, the IIP deficit reached a record (for the US) of -27%. Commonly accepted wisdom based on a combination of models and experience is that an IIP bigger than +30% of GDP or smaller than -30% is a problem. On the IIP surplus side, having too big of a net creditor position leads to a perennially strengthening currency that chokes out industry and stokes deflation (think JPY). On the IIP deficit side, having too big of a net debtor position leads to a debt spiral. High debt leads to reluctant external creditors charging ever high interest rates, which leads to economic stagnation and ultimately crisis. The US may not be able to run another dozen years of 3-6% current account deficits without starting to look like a ponzi scheme - but while risk aversion flows (and rates) suggest there is little to worry about, we have noted again and again the moves behind the scenes in global trade flows to shift away from the world's current numeraire.
Haim Bodek thought practically nonstop for days about what the trade-venue representative had told him that night at the New York party. The way that the abusive order types worked made him think back to a document he’d been given by a colleague that summer as he researched what was going wrong at Trading Machines. The document was a detailed blueprint of a high-frequency method that was said to be popular in Chicago’s trading circles.
It was called the “0+ Scalping Strategy.”
From what seemed like a very low bar on expectations, last week's summit headlines surprised modestly on the upside, even if the details remain far from clear - and implementation even murkier. Political talk of wanting to break the link between sovereign and banking risk was well-received by markets - but we remind all that talk-is-cheap with these Euro-pols. As Goldman noted this weekend, "we do not see the outcome as a game changer", rather can-kicking until one of four possible endgames are realized. The absence of any explicit commitment to plans for fiscal or political integration; the lack of reference to any pan-European deposit insurance; and Ms. Merkel's limited concessions (to ensure passage of the growth compact) to the terms on which the existing pool of EFSF/ESM resources are offered leaves the underlying issue - the terms on which mutualisation of financial risk is offered by Germany in return for mutualization of control over fiscal decisions throughout the Euro area - remaining inharmonious. German tactical concessions at the summit do not change their basic position on this issue: that discipline, reform and consolidation must be achieved and cemented first before mutualization of financial obligations is possible. Looking to the future Goldman sees four paths for the Euro are from here - and short-term too many crucial issues are left unresolved.
I’ll be the first to admit the incredible aggravation I feel whenever liberty is trampled upon by the state’s obedient minions. Everywhere you look, government has its gun cocked back and ready to fire at any deviation from its violently imposed rules of order. A four year old can’t even open a lemonade stand without first bowing down and receiving a permit from bureaucrats obsessed with micromanaging private life. The state’s stranglehold on freedom is as horrendous as it is disheartening. The worst part is that the trend shows no signs of slowing down, let alone reversing. Politicians are always developing some harebrained scheme to mold society in such a way to circumvent the individual in favor of total dictation. If it isn’t politicians, then it’s an army of unelected bureaucrats acting as mini-dictators.
There is a reason why WWII legendary "pineapple" grenade bore the initials MK2. Those who enjoy the works of Mike Krieger and Max Keiser are in for a treat, with this 2 for the price of 1 (technically for the price of zero) interview of Krieger by Keiser, as the MKs of the world unite, and take on financial fraud.
Markets are true democracies. The allocation of resources, capital and labour is achieved through the mechanism of spending, and so based on spending preferences. As money flows through the economy the popular grows and the unpopular shrinks. Producers receive a signal to produce more or less based on spending preferences. Markets distribute power according to demand and productivity; the more you earn, the more power you accumulate to allocate resources, capital and labour. As the power to allocate resources (i.e. money) is widely desired, markets encourage the development of skills, talents and ideas. Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivisation of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored. This complex process begins with the designation of money, which is why the choice of the monetary medium is critical. Like all democracies, markets can be corrupted.
Three weeks ago we mocked, rightfully so, the utter joke that is Liebor, which had been unchanged for just over 3 months. Nobody cared, certainly not the British Banker Association. This was not the first time: our first allegations of Liebor fraud and manipulation started over three years ago. There were others too. Nobody certainly cared back then. Now, in the aftermath of the Barclays lawsuit, and "those" e-mails, everyone suddenly cares. And a few days after the first public exposure of Lie-borgate, the first victim has been claimed: as numerous sources report, Barclays' Chairman Marcus Agius wil step down immediately. From the WSJ: "Political and investor pressure has mounted on the management of U.K.-based Barclays since the settlement was announced Wednesday. The announcement of Mr. Agius's departure could come as soon as Monday, said one of the people. Mr. Agius, 65 years old, a British-Maltese banker who formerly worked at Lazard Ltd., has led the bank since 2007, steering Barclays through the 2008 financial crisis and avoiding the direct state bailouts that were needed by many of its global peers." While the sacrifice of a scapegoat is expected, what we don't get is why the Chairman: after all by the time Agius became Chair of the British bank, the bulk of the Libor fixing alleged in the FSA lawsuit had already happened. And of course, with Bob Diamond having succeeded John Varley as CEO in 2010, one can easily claim that in this first (of many) confirmed Liebor transgression there really is nobody at fault who can be held accountable. Of course, Barclays is merely the first of many. We fully expect Lieborgate to spread not only to other British BBA member banks, but soon to jump across the Atlantic, where CEOs who have been with their banks for the duration of the entire Libor-fixing term will soon find themselves under the same microscope.
In a development that is too hilarious for even the most hardened cynics to pass by, starting today, the rotating presidency of the EU will be handed over to... broke Cyprus. We learn this and much more about the onslaught of sovereign debt auctions out of Spain and France in the month of July (explaining the urgency to come up with any mechanism to keep Spanish and Italian bond yields below 7% as absent some deux ex, no matter how temporary, the whole charade may have ended as soon as 31 days from today) courtesy of the following calendar of key events out of Europe.
While we are still collecting various public polling results showing popular sentiment in the aftermath of the Supreme Court's surprising Obamacare ruling last week, the first results out of Rasmussen show that if Judge John Roberts' goal was to somehow restory credibility in the supreme judicial entity, following his alleged flip flopping on the ACA, whereby he passed the Individual Mandate in a format never intended by the Obama administration, he has failed. From Rasmussen: "A week ago, 36% said the court was doing a good or an excellent job. That’s down to 33% today. However, the big change is a rise in negative perceptions. Today, 28% say the Supreme Court is doing a poor job. That’s up 11 points over the past week."
Last week's false flag story of baseless Middle Eastern provocation refuses to go away. Even after, in a shocking turn of events, US intelligence confirmed this weekend that Syria's version of events surrounding the downed Turkish F-4 jet story was the right one all along, pulling the media narrative rug right from under Hillary Clinton's provocative feet (and making others wonder just which country is the only one that stands to benefit of NATO does pull Article 4 or 5 and does invade Syria on now invalidated and false premises), today we read that Turkey continues to try to escalate. From the BBC: "Turkey has scrambled six F-16 fighters jets near its border with Syria after Syrian helicopters came close to the border, the country's army says. A total of six jets were sent to the area in response to three such incidents on Sunday, although there was no border violation, the Reuters news agency quoted the statement saying. On Friday, Turkey said it had begun deploying rocket launchers and anti-aircraft guns along the border in response to the downing of its F-4 Phantom jet." Of course, without an actual confirmed provocation, such as the one Turkey itself pulled against Syria, it is left with the same media rhetoric that continues to expose just one side of the Syrian story - the Western media spun one. "Turkey has strongly criticised Syria's response to the 16-month anti-government uprising, which has seen more than 30,000 Syrian refugees enter Turkey." Fair enough, we do however wonder what Syria would say about Turkey's treatment of Kurdish minorities. Finally, confirmation that just as we first suggested two weeks, this whole incident has been nothing but a provocation stage test to get NATO involved without any of the facts being on the table, comes from no other source than US military intelligence.
While the Lieborgate scandal gathers steam not so much because of people's comprehension of just what is at stake here (nothing less than the fair value of $350 trillion in interest-rate sensitive products as explained in February), but simply courtesy of several very vivid emails which mention expensive bottles of champagne, once again proving that when it comes to interacting with the outside world, banks see nothing but rows of clueless muppets until caught red-handed (at which point they use big words, and speak confidently), the BBC's Robert Peston brings an unexpected actor into the fray: the English Central Bank and specifically Paul Tucker, the man who, unless Goldman's-cum-Canada's Mark Carney or Goldman's Jim O'Neill step up, will replace Mervyn King as head of the BOE.
Even as Spain, Italy and soon France are scrambling to break the link between sovereigns and banks, an unpopular move that until recently Germany was very much against as it permitted the culture of endless unsupervised bank bailouts on taxpayer dimes to continue, we get a fresh reminder of why any unconditional aid, entitlement, or backstop guarantees funded by "other people's money" is always inevitably a bad idea. Case in point: Spain, which just said that its economy will contract in Q2 even more than in Q1. This reminds us why any claims of "austerity" are a total mockery: only Keynesian priests seem unable to grasp that countries gain much more upside from pushing their economies to the brink only to be bailed out, than from engaging in real economic viability and sustainability programs: i.e., living within your means (something we proved empirically before). Finally, this is also a stark reminder that when one removes out all the bailout noise and the daily high-beta gyrations of sovereign debt, the real reason why sovereign bondholders should be buying Spanish debt - an actual improvement in its economy- continues to not only be absent, but by the very nature of endless now-monthly bailouts, becomes impossible as debt never fixed more debt.
In early December 2009, Haim Bodek finally solved the riddle of the stock-trading problem that was killing Trading Machines, the high-frequency firm he’d help launch in 2007. The former Goldman Sachs and UBS trader was attending a party in New York City sponsored by a computer-driven trading venue. He’d been complaining for months to the venue about all the bad trades—the runaway prices, the fees—that were bleeding his firm dry. But he’d gotten little help.
Brad DeLong makes an odd claim:
So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.
Larry Summers? If we’re going to base our economic policy on trusting in Larry Summers, should we not reappoint Greenspan as Fed Chairman? Or — better yet — appoint Charles Ponzi as head of the SEC? Or a fox to guard the henhouse? Or a tax cheat as Treasury Secretary? Or a war criminal as a peace ambassador? (Yes — reality is more surreal than anything I could imagine).